Investment Case: Brunswick Corporation
Date of writing – March 13, 2018
In this Quarterly, we like to share our vision on Brunswick Corporation. The Brunswick share has been part of the GSC portfolio since October 2014 and is now one of our bigger positions. This investment case is also a good example of our committed shareholding. We close the case with a number of recent and interesting developments.
I. Description of Brunswick
At present, Brunswick consists of three business units. Below is an overview of the segments as presented at the Brunswick Investor Day on 7 November 2017. The company defines three business segments: Engine, Boat and Fitness.
Overview of the three segments as presented by Brunswick on its Investor Day, 7 November 2017
The business segment Engine represented over 70% of the operational profit in 2017 . We further divide this business into two components: outboard motors and boat parts/accessories. We consider both components together as the crown jewels of the company.
Brunswick’s engines, for example, are built in half of all the boats in the US . Together with the Japanese Yamaha, we estimate that Brunswick holds 70% of the market worldwide. In the boat parts/accessories segment, Brunswick is even the biggest player worldwide .
The Boat segment may be big in terms of turnover, but its profitability is small. Its contribution to the profit is therefore limited, which makes it the smallest segment. As there are clearly synergy benefits between the segments of Engine and Boat, these two together are also referred to as the Marine segment.
Finally, Brunswick is also the largest player in the field of commercial fitness equipment with brands such as Life Fitness, Hammer Strength, Cybex, Indoor Cycling Group and SCIFIT. We see this segment as an isolated activity, as there is little or no overlap with the other two segments.
II. Hidden value
The Engine segment has performed extremely well in recent years. The value of this segment together with the Boat segment is, in our view, practically equal to the value that the stock exchange allocates to the entire company. In other words, we think the market currently values the fitness division at zero.
The main reason for this undervaluation is also known as the conglomerate discount. Brunswick effectively has two segments (Marine and Fitness) with little or no synergy. The group of investors able to estimate both assets by value is much smaller than the sum of the groups of investors that would be enthusiastic about the individual assets. A concrete example is that investors seeking exposure in the growing health and fitness market will certainly be very interested in Brunswick’s Fitness segment. But in the end, they will probably draw the conclusion that Brunswick is not an interesting investment to respond to this trend as the Fitness segment accounts for less than 20% of Brunswick’s operating profit .
For investors who want to invest in a market leader in the Marine segment it’s frustrating to also have to put a lot of time and energy in understanding the Fitness division. In 2017, this feeling was encouraged by a disappointing segment performance. This became particularly clear on 26 October 2017, when Brunswick published its Q3 results. The Engine segment reported very strong results, where the results for the Fitness segment were well below the expectations of analysts causing the stock price to drop by more than 15% to $49 and below.
III. The four central elements of our philosophy collided on 26 October 2017
As a long-term fundamental shareholder, we saw an opportunity in this drop on 26 October. The profit warning also came as a surprise to us, but at the same time we considered Brunswick’s core business (Marine) to be very healthy. The problems in the Fitness segment were disappointing, but since we thought Brunswick didn’t get any credits for it anyway, we looked at the 15% drop as a short-term overreaction. We see this type of reactions happen regularly and as a contrary value investor, we like to use it as an opportunity to buy more.
Source: Kempen Global Small-Cap Philosophy slide
As a committed shareholder, we then put our vision for Brunswick on paper and shared it with the company. We mainly wished for more focus and put in a request to reconsider the portfolio and especially the Fitness segment in it. On 13 November 2017, Mark Schwabero, CEO and Chairman of Brunswick visited our Amsterdam office. On this occasion, we discussed our vision on Brunswick once again.
IV Adroit Board of Directors
Since the disappointing figures of Q3-2017, Brunswick’s board of directors has been in action. Early December, they announced to close down the loss-making boat brand Sea Ray. We think that’s a good decision, as there hardly seemed to be any overlap between Sea Ray and the other Marine business. We generally believe that companies with more long-term focus will perform better.
On January 30 of 2018, this was met with support from the activist shareholder Owl Creek. In a public letter to Brunswick’s BoD, Owl Creek also argued for a separation of the Fitness division.
Overview of the Fitness market as presented by Brunswick on the Investor Day, 7 November 2017
On 1 March 2018, Brunswick announced its plans to separate the Fitness division. This segment is expected to become a separate listed company in the first quarter of 2019. We strongly believe that both companies will perform better with the increased focus and that they will be valued higher by the stock market as a result. In our view, Brunswick’s BoD deserves a huge compliment for its decisiveness.
In summary, we remain very enthusiastic about the Brunswick stock price. We believe in the power of Brunswick’s portfolio. The company is a market leader in several niche segments. We expect that the focus resulting from the upcoming separation of the Fitness division will lead to an even better execution. In our view, the company is well-managed and the shares of Brunswick are undervalued. We look forward to the spin-off process in which we are potentially given new and additional opportunities. In about a year, we are able to decide for ourselves in which company we would like to invest, Marine and/or Fitness, and how much we want to invest.
 Source: Brunswick 10Q’s an 10K 2017
 Source: 2018 Brunswick Marine Product Review – 15 February 2018
 Source: 2018 Brunswick Marine Product Review – 15 February 2018
 Source: Brunswick 10Q’s en 10K 2017
This document is prepared by the fund managers of Kempen (Lux) Global Small-cap Fund (‘the Fund’),managed by Kempen Capital Management N.V. ("Kempen‘’). The views expressed in this document may be subject to change at any given time, without prior notice. Kempen has no obligation to update the contents of this document. As asset manager Kempen may have investments, generally for the benefit of third parties, in financial instruments mentioned in this document and it may at any time decide to executebuy or sell transactions in these financial instruments. The information in this document is solely for your information. This document should not be considered to constitute an investment recommendation and it is not intended as an offer or a solicitation to buy or sell any financial instrument mentioned in this document. This document is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The views expressed herein are our current views as of the date appearing on this document. This document has been produced independently of the company and the views contained herein are entirely those of Kempen.